Negative Effects of Money Laundering on The Economy

What Are The Negative Effects of Money Laundering on The Economy?

Money laundering damages financial sector institutions that are critical for economic growth, promoting crime and corruption that slow economic growth, reducing efficiency in the real sector of the economy. The majority of global research focuses on two major money-laundering sectors: drug trafficking and terrorist organizations. The effect of successfully clearing drug money is obvious: more drugs, more crime, more violence. The link between money laundering and terrorism is complicated. Terrorists are knocking down money so that the authorities cannot monitor them and prevent their planned attacks.

Money laundering is a problem not only in the world’s major financial markets and sea centers but also in emerging markets. As emerging markets open up their economies and financial sectors, they are becoming increasingly appropriate targets for money laundering activities. Money laundering creates unpredictable changes in money demand, as well as causing large fluctuations in international capital flows and exchange rates.

The Decrease in Government Revenues

Money laundering is a global phenomenon that undermines the economic and political stability of States. As it becomes difficult for the government to generate income from the related transactions, which are frequent in the informal economy, it decreases tax revenues, which causes a serious negative impact on the economy.

Socio-economic Costs

If money laundering is not dealt with effectively, there will be negative social and political effects. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and entire governments. The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society.
The socioeconomic effects of money laundering are diverse because dirty money from criminal activities flows into legitimate funds; they are used to expand existing crime transactions and finance new ones. Also, money laundering leads to the transfer of economic power from the market, the government, and citizens to criminals. Transfer of economic power further increases crimes and corruption.

Business Impact of Money Laundering

Money laundering impairs the development of the legitimate private sector. Money launderers have different business economies and can offer their products below production costs. It sounds ridiculous, but they don’t have to make a profit with their products and earn a margin. Their primary goal is to launder to the funds as they have already made a cut with criminal activity. This makes it very difficult for legitimate activities to compete, eventually forcing them to go out of business.

Criminals may also purchase businesses, which were initially productive, and turn them into partners in crime to launder their funds. This leads to a decrease in the productivity of these businesses, and, at scale, to a decrease in the overall productivity of the economy.

What to Do to Reduce The Negative Effects of Money Laundering?

Creating awareness and providing the education is one of the most important aspects of the controlling money laundering activities. The certification programs like Certified Anti Money Laundering Experts have proven that there is a significant impact of awareness on combating the money laundering crimes.

Emerging economies may find it difficult to break the cycle of corruption even though they have less anti-money laundering (AML) regulations. Criminals are more likely to target weaker systems. This means losing a lot of money for laundering, but the government lacks funds to prevent this.

As a result, developing countries need to receive assistance from international and regional organizations to secure their economic systems. Money laundering and terrorist financing have weakened and failed many financial institutions due to non-compliance with money laundering and counter-terrorism financing programs. AML CTF Compliance violation leads to closure of the banks in different parts of the world. Some banks had to be closed after the loss of regulations resulting from AML / CFT compliance violations. Financial institutions are the backbone of the economy, but the problem begins when channels for money laundering are created.

The United States, the European Union, and UNO have configured frameworks to protect the world financial system from money laundering and terrorist financing actions. Targeted and comprehensive sanctions are applied to persons, legal entities, and jurisdictions that violate AML / CFT regulations, facing serious economic difficulties. The US Foreign Assets Control Office (OFAC) and the Financial Action Task Force (FATF) are important organizations for this purpose. As a result, financial institutions, in particular, do not have difficulty breaking the money laundering chain when they have regulations such as AML / CTF.

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